When governments intervene in the market to expand or reduce the demand, this course of action is ..........
Answer & explanation
Correct answer: option 3
The correct answer is Option (3) → Stabilization Function
The level of employment and prices depends on aggregate demand, which comes from the spending decisions of millions of private households and firms. When their spending is too low, output falls and unemployment rises; when it is too high, prices rise. The government can step in to expand or reduce the demand through its budget, spending more and taxing less in a slump, and the reverse in a boom. Correcting these fluctuations in income and employment is the stabilisation function of the government budget.
Why the other options are incorrect
Option (1) Allocative Function — Incorrect. Through the allocation function the government provides goods the market does not, public goods such as national defence, roads and administration.
Option (2) Distribution Function — Incorrect. Through the redistribution function the government uses taxes and transfers to change the distribution of income towards one society considers fair.
Option (4) Fiscal Function — Incorrect. All three functions are carried out through fiscal policy; ‘fiscal function’ is not one of the functions of the budget.
Note: A same/similar question was asked in CUET (UG) in the papers below.
| 2026 | 2025 | 2024 | 2023 | 2022 |
| 13-05 S2* 31-05 S1* | 13-05 S1 14-05 S1* | – | 23-06 S3* | – |
* A similar question.
NCERT (2026-27): “Redistribution Function of Government Budget … The government may need to correct fluctuations in income and employment. The overall level of employment and prices in the economy depends upon the level of aggregate demand which depends on the spending decisions of millions of private economic agents apart from the government. These decisions, in turn, depend on many factors such as income and credit availability. In any period, the level of demand may not be sufficient for full utilisation of labour and other resources of the economy. Since wages and prices do not fall below a level, employment cannot be brought back to the earlier level automatically. The government needs to intervene to raise the aggregate demand. On the other hand, there may be times when demand exceeds available output under conditions of high employment and thus may give rise to inflation. In such situations, restrictive conditions may be needed to reduce demand. The intervention of the government whether to expand demand or reduce it constitutes the stabilisation function.…” |